The Minnesota Department of Transportation is set to try an idea that economists have advocated for years: congestion pricing. Whether it will make traffic flow more efficiently on Interstate 394 is still to be proved.
Not everyone understands the idea behind congestion pricing or how it is supposed to improve things. Considering an analogous situation might help.
U.S. grain elevator operators and railroads have frustrated each other for more than 100 years. Elevator operators always wanted to have many empty rail cars standing by and to have them hauled away immediately when filled with grain. Railroads hated to invest in infrastructure or equipment that got little productive use.
Unlimited transportation capacity allowed elevators to ship some grain on to other terminals during harvest, reducing their own needed storage capacity.
Responsive transportation also let elevators take advantage of high prices by ensuring they could deliver grain within deadlines.
However, it would have taken an enormous investment in rail cars, locomotives, tracks and bridges to please every elevator. Although that capacity would satisfy all elevators in peak periods, it would sit idle for most of the year.
Railroads, of course, preferred a system in which elevators dribbled out small quantities of grain each day, regardless of harvests or price spikes. Their ideal investment level would be just enough to finish moving grain from the 2004 crop year a day or two before the 2005 harvest began.
From the establishment of the Interstate Commerce Commission in 1887 to railroad deregulation in 1980, few incentives existed to reconcile the diverging interests of railroads and grain handlers. The issue was fought out in the commission’s bureaucracy and in periodic congressional hearings. But regulated prices obviated any pricing incentives for better service.
Since deregulation, railroads have offered different levels of service in return for different prices. Elevators wanting a guaranteed number of cars that will be hauled to a specific destination by a specific date can pay more and get that service. Those preferring a cheaper price might have to accept highly unpredictable service. Both sides still grumble about the other, but the inherent conflict is resolved through a price mechanism.
Auto drivers are like grain elevator owners. We all want to drive wherever we want, whenever we want, without being inconvenienced by lack of infrastructure. We pay gasoline taxes, but they impose little additional cost for driving an extra mile.
Moreover, the only extra cost we face for driving during busy hours is the value of our own time. If a rapid trip during the rush hour is especially important to us, there is no way for us to get it — just as an elevator with an urgent shipment had no way to jump the queue with regulated railroad rates.
If people ride the bus, use a car pool or drive at off-peak hours, the rest of rush-hour commuters benefit, at least slightly, from decreased congestion. This is an “external benefit.” Economic theory is clear that when one person bears the cost of good X, but others capture some of the benefits, free markets will not produce enough of good X to be optimal for society. Society can be better off by compensating people to take such beneficial action.
That’s why car pools get a faster drive in high-occupancy-vehicle lanes. In return for the externally beneficial act of car-pooling, which reduces congestion, the car-poolers get to spend less time commuting.
Such lanes do nothing to help people who need fast trips and have no time flexibility. Moreover, they are blunt instruments. One person per car is low occupancy. But two, five or 12 all fall into the single category of high-occupancy.
Traffic flows most efficiently, and human satisfaction is maximized, when HOV lanes are used close to capacity. Every additional car diverted into the HOV lanes, as long as those lanes themselves are not saturated, reduces congestion for those in the regular lanes. But the high-occupancy preference might not divert optimal numbers of cars to these lanes.
Letting people who need speedy commutes pay more for using the HOV lanes is a way to improve use of these lanes. Modern technology allows the fee to vary with traffic flows. If the HOV lane is underused, additional drivers can get on at low cost. If it is near capacity, they must pay substantially more. This reduces the possibility that the HOV lane itself will slow because of congestion.
Economists think that the system will motivate behaviors that use roads more efficiently. All drivers will benefit in at least a small way, not just those paying to drive in the fast lane. And the scheme will raise some additional revenue to supplement taxes. The coming experiment will let us see how it works out in practice.
© 2005 Edward Lotterman
Chanarambie Consulting, Inc.